Brazil Real Drops as Fed Expectation Weakens Emerging Currencies

  • Traders are monitoring prospects for vote on spending-cap bill
  • ECB has not discussed timetable of QE, Vice President says

Brazil’s real dropped as emerging-market currencies weakened after Federal Reserve officials signaled the U.S. economy is ready for an interest-rate increase.

The real fell 0.2 percent to 3.2280 per dollar Thursday in Sao Paulo, after sliding as much as 0.7 percent. The currency reversed its earlier decline after ECB Vice President Vitor Constancio said the governing council has not discussed the timetable of QE. The MSCI index of emerging-market currencies declined 0.1 percent, dropping for a third day.

Investors lured Brazilian benchmark rates that are more than 28 times the equivalent in the U.S. have turned the real into the world’s best-performing currency this year. But in the past week, four regional Fed presidents have suggested that an increase in borrowing costs will be on the table at policy makers’ next meeting on Nov. 2. The strength of the dollar has offset optimism following Brazilian newspaper reports that President Michel Temer has most of the votes he needs to approve a spending-cap bill in the lower house next week.

"The outlook for monetary policy in the developed world is dominating sentiment," said Camila Abdelmalack, the chief economist at CM Capital Markets in Sao Paulo. "Domestically, the environment is very positive as Temer seems to have the support to approve an important step for the fiscal adjustment, which is key” for the real to resume strengthening.

Real’s decline lost strength after Constancio said the ECB QE will go on until the authorities are satisfied that inflation is truly on the path to our objective, and at least until March of next year.

"The external scenario improved after ECB Vice President’s comments that there is no consensus yet," Vitor Suzaki, an analyst at brokerage Lerosa Investimentos, said from Sao Paulo.

Borrowing dollars to buy reais in a so-called carry trade has returned 34 percent this year, the most among 42 currencies tracked by Bloomberg.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, fell 0.07 percentage point to 12.01 percent.

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